UPDATE: The official results are in, and revealed Enel's low-cost bid was for wind -- not solar. Preliminary results did not specify technologies. Regrettably, there are errors in the story below as a result. We've retained this story in the interest of transparency. GTM reported on the final results of Mexico's latest energy auction here.

Preliminary results from Mexico’s latest energy auction have broken the lower boundary for solar costs, following a trend seen in other auctions around the world.

The Mexican government this month announced the average price achieved in its third long-term auction of 2017 was $20.57 per megawatt-hour, which it said is “one of the lowest prices achieved internationally.”

A breakdown of the winning bids, published by Electrek, shows Italian developer Enel pitching two solar lots at $17.70 per megawatt-hour, or just 1.77 cents per kilowatt-hour -- the lowest bid achieved anywhere in the world so far. Two years ago, the U.S. solar sector was cheering projects priced below 4 cents per kilowatt-hour.

The record-low rate comes hot on the heels of an auction in Chile that saw Enel bidding $21.48 per megawatt-hour of solar power on one sub-block of capacity.

It was the lowest price for solar in the whole of Latin America, but not quite as cheap as bids achieved in the Middle East not long before.

In October, a tender for 300 megawatts of solar power in Saudi Arabia saw Abu Dhabi developer Masdar offering a price of $17.86 per megawatt-hour, the lowest cost on the planet up until Mexico’s results this month.

Wind power also hit an eye-poppingly low price point in Mexico, coming in at $22 per megawatt-hour for a 118-megawatt project proposed by Engie Wind. “Wind energy’s race to the bottom may have just ended in Mexico,” observed MAKE Consulting partner Dan Shreve in a blog post.

The price was almost half of the lowest bid for wind energy in Mexico last year, belonging to Enel, which MAKE attributed to a combination of low project internal rates of return, a low landed cost of turbines, and extremely low operational expenses.

To make this year’s wind costs work, said Shreve, Engie would need to gain access to new turbine technology at a favorable price and expect to be able to run it for at least 25 or 30 years instead of the more typical 20. This leaves Engie exposed to significant risks, however.

First, there is no guarantee that newer turbines will be able to last longer.

Second, the power-purchase agreements (PPAs) on offer are only for a term of 15 years, although Shreve noted that a transition to higher-priced wholesale markets might actually help project economics after the PPAs run out.

Despite this, Engie will probably be looking at a project internal rate of return of around 5 percent, compared to the 7.5 percent that Enel might have been able to make from its market-leading pitch last year.

“It means only the biggest players stand a chance in these new auction systems,” Shreve concluded. “In order to take on both market and technical risks, the company must have substantial capital and credit.”

GTM Research Americas solar analyst Manan Parikh confirmed the same pattern for solar. “Most of the developers that are in there are major developers,” he said. “We’ve seen them before, either in Mexico or in the broader region. I don’t think there are any surprises in who is winning.”

Mexico’s National Energy Control Center (Centro Nacional de Control de Energía) is due to confirm the auction results this week. For now, the government is claiming the exercise will attract almost $2.4 billion in investment.

Mexico auctioned off 5.49 million megawatt-hours of energy, 593 megawatts a year of power capacity, and 5.95 million clean energy certificates. Solar was the big winner, taking 55.4 percent of the energy and 58.3 percent of the certificates on offer.

Solar and wind also took around 2 percent and 14 percent, respectively, of the power capacity being auctioned, with the rest going to gas.

The average energy pricing represents an almost 66 percent savings on the maximum price of $60 per megawatt-hour set by the three offtakers in the auction: the state-owned Federal Electricity Commission (Comisión Federal de Electricidad or CFE), Iberdrola and Cemex.

“The clean energy acquired in this auction is equal to approximately 1.78 percent of the annual electricity generation in Mexico,” said the government. “This result is an important addition toward meeting the aim of generating 35 percent of electrical energy in Mexico from clean sources by the year 2024.

***

Join GTM February 13-14 in Mexico City for an in-depth look at the country's rapidly expanding solar market. Solar Summit Mexico will leverage GTM Research’s expertise in Mexico to ensure your company is uniquely positioned to capture specific opportunities while appropriately managing regulatory, political and market risks.Find out more here.

An earlier version of this article used the incorrect monetary term for Enel's solar bid. The bid came in at 1.77 cents per kilowatt-hour, not $1.77 per kilowatt-hour. We regret the error.